Amicus Curiae Brief — Consolidated Rail Corp. v. Delaware & Hudson Railway Co.

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—

Cyoreme LuUrt, U.S. \

EEL aD

1391

Iu the Supreme Court of the Un

OCTOBER TERM, 1990 |

CONSOLIDATED RAIL CORPORATION, PETITIONER

Vv.

DELAWARE & HUDSON RAILWAY COMPANY

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

KENNETH W. STARR

Solicitor General

JAMES F. RILL

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

ALISON L. SMITH

Deputy Assistant Attorney General

MICHAEL R. DREEBEN

Assistant to the Solicitor General

CATHERINE G. O’SULLIVAN

DAVID SEIDMAN

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 514-2217

a EL EE II I TIE TN aE I NINE TED

™ a a Ba a tie

QUESTIONS PRESENTED

1. Whether a lawful monopolist has a duty to deal

with a rival on terms allowing the rival a reasonable

profit without regard to the effect on competition of a

refusal to deal on such terms.

2. Whether the court of appeals held that a monopolist’s

anticompetitive intent can transform otherwise lawful

conduct into a violation of Section 2 of the Sherman Act.

38. Whether the “essential facilities” doctrine provides

a basis for holding that a monopolist must make a facility

available to a competitor at a particular price solely to

assure that the competitor earns a profit satisfactory to

it.

(I)

TABLE OF CONTENTS

EG I Nera ARR ae IY

ia at he ad Satna aanioninncinion

eg aa TN ea eI OSS, DS A ee CE OE IEEE

TABLE OF AUTHORITIES

Cases:

A.J. Poor Grain Co. Vv. Chicago, Burlington &

Guteey Be., 15 LCL. 418 (1907) ..........................

American Academic Suppliers, Inc. v. Beckley-

Cardy, Inc., 1991-1 Trade Cas. (CCH) { 69,296

ee ee sssadunacetuaneemenemnces

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,

Ste we. SES (1986) ......................... 5, 8, 9, 12, 13,

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d

263 (2d Cir. 1979), cert. denied, 444 U.S. 1093

Re nascbiessiieneucsaiinean

Brown Shoe Co. v. United States, 370 U.S. 294

eet hae ca vededindaeuunon

Chesapeake & Ohio Ry. v. United States, 704 F.2d

i nh ses ieemcincianenneica 3.

Chicago & N.W. Ry. V. A., T, & S.F.R.R., 387

Sy i oa caaeueuunin

Continental Cablevision Vv. American Elec. Power

Co., 716 F.2d 1115 (6th Cir. 1983) ......................

Laurel Sand & Gravel, Inc. v. CSX Trans., Inc.,

1991-1 Trade Cas. (CCH) {| 69,321 (Jan. 30,

sac ea cdnseenncanehasonians

Louisville Board of Trade v. Indianapolis, C. & S.

Traction Co., $4 1.C.C. 640 (1915) ........000..

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

I I UID oo, 5 ccnonmnavewasisnimesnccassancciauke

MCI Communications Vv. American Tel. & Tel. Co.,

708 F.2d 1081 (7th Cir.), cert. denied, 464 U.S.

ae Se A So a

Mid-South Grizzlies v. National Football League,

720 F.2d 772 (3d Cir. 1983), cert. denied, 467

I I os csnenheemctnnteawsncnsicd RE OR SSeS

14, 15

11, 13

Cases—Continued:

Olympia Equip. Leasing Co. v. Western Union Tel.

Co., 797 F.2d 370 (7th Cir. 1986), cert. denied,

Ge es I OD os iecieiciieinecncecerctecceerchttecaet

The New England Divisions Case, 261 U.S. 184

KDR Stati tae OUR eNO < eee fe ck gC

United States Football League v. National Foot-

ball League, 842 F.2d 13835 (2d Cir. 1988) _......

United States v. Great Northern Ry., 343 U.S. 562

fA ARIR RIALS NWO ON Ur PNA RN OORT RAED

United States v. Terminal R.R. Ass’n, 224 U.S. 383

ca paginas

Statutes and rule:

Bankruptcy Code:

so oe ee Be OOO

Page

Sherman Act § 2, 15 U.S.C. 2 0000... 4, 5, 6, 8, 14, 16, 18

Staggers Rail Act of 1980, Pub. L. No. 96-448, 94

RST EAA ETAree ETL SeenON RNR Oe et Meret eee

Transportation Act of 1920, ch. 91, 41 Stat. 456...

PRES ky EG | | ee ae eee

I ea tegen

eT | | Baan eeeeeeenneres Saiavaleanaaeiacads

SI I II oot ccnaielt icsecnnircrndtans

Miscellaneous:

Areeda, Essential Facilities: An Epithet In Need

Of Limiting Principles, 58 Antitrust L.J. 841

RSPR TRS ERC DORR ach aOR ROE AERO PTH ATS PEROT

RNS DE RISE ROIs ESTAS NTIS SE PANE

R. Bork, The Antitrust Paradox (1978) ................

H.R. Conf. Rep. No. 1430, 96th Cong., 2d Sess.

ARERR EAR ry tee apap Ty SM ZAR

Teagarden, The Federal Government and Railroad

Rate Divisions: Policies and Practices, 55

ee is a ie SE catheters

2,1

Nwwow ow

Iu the Supreme Court of the United States

OCTOBER TERM, 1990

No. 90-380

CONSOLIDATED RAIL CORPORATION, PETITIONER

Vv.

DELAWARE & HUDSON RAILWAY COMPANY

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

This brief is submitted in response to the Court’s in-

vitation to the Solicitoi General to express the views of

the United States.

STATEMENT

1. Petitioner Consolidated Rail Corporation (Conrail)

and respondent Delaware & Hudson Railway Company

(D&H) carry freight in the northeastern United States.

Congress created Conrail in response to the financial col-

lapse of regional railroads in the 1970s, combining several

rail systems into one system with about 17,000 miles of

track. D&H, both older and smaller, has only about a

tenth as much track. Pet. App. 2a, lda.

Because of D&H’s smaller size, its tracks do not reach

the termini necessary to serve many northeast recipients

of newsprint shipped from Quebec. D&H’s routes to these

recipients, therefore, must employ Conrail’s tracks for

part of the journey. In contrast, Conrail can serve these

same customers over its own-tracks without using those

(1)

of D&H. All of these newsprint routes originate on the

tracks of Canadian railroads. Pet. App. 2a-3a.

Rail shipments involving the tracks of multiple rail-

roads are conventionally subject to “joint rates” (single

rates charged to shippers for the entire shipment), with

the revenues divided among the railroads involved accord-

ing to a particular “division.” Pet. App. 3a. Historically,

rail regulation served to assure that shipping rates were

equal over all routes between two given points.’ The

division of revenues between carriers participating in

joint routes, however, might differ between routes. Divi-

sions were determined either by negotiations among the

railroads or by Interstate Commerce Commission pre-

scription.

In prescribing divisions, the starting point, and some-

times the ending point, was the mileage of each railroad

participating in the joint rate: “As a general rule where

operating conditions are substantially similar, the straight

mileage pro-rate is accepted as a fair basis for dividing

joint rates.” Louisville Board of Trade v. Indianapolis,

C. & S. Traction Co., 34 1.C.C. 640, 642 (1915), quoted

in Teagarden, The Federal Government and Railroad

Rate Division: Policies and Practices, 55 Transp. Prac.

J. 15, 18 (1987). The Transportation Act of 1920, ch.

91, 41 Stat. 456, provided for ICC determination of “just,

reasonable, and equitable divisions” and specified factors

to be considered in determining divisions, including the

efficiency of the carriers, their revenue requirements, and

other facts “which would ordinarily, without regard to

the mileage haul, entitle one carrier to a greater or less

1“The principle * * * is vital in our commercial life that there

shall be one fixed and absolutely rigid rate governing the trans-

portation at a given time of any given commodity between two

given points.” A.J. Poor Grain Co. v. Chicago, Burlington & Quincy

Ry., 12 1.C.C. 418, 423 (1907). See also Chesapeake & Ohio Ry. Vv.

United States, 704 F.2d 373, 376 (7th Cir. 1983) (“Although the

routes are different, the origin, destination, and commodity are the

same, so the joint rates almost certainly would have to be the same

to avoid violating the prohibition against rate discrimination in 49

U.S.C. § 10741 (a).”).

proportion than another carrier of the joint rate.” 49

U.S.C. 15(6) (1976) (repealed).* That provision of the

Transportation Act “was designed for affirmative use in

relieving the financial needs of weak carriers.’”’ United

States v. Great Northern Ry., 343 U.S. 562, 569 (1952),

citing The New England Divisions Case, 261 U.S. 184,

189-195 (1923). Nevertheless, divisions continued to be

hased in substantial measure on mileage. F.g., Chicago

& N.W. Ry. v. A., T, & S.F.R.R., 387 U.S. 326 (1967)

(weighted mileage).

The Staggers Rail Act of 1980, Pub. L. No. 96-448, 94

Stat. 1895, substantially deregulated railroad rates. Pet.

App. 3a, 16a. Nonetheless, prior to 1982, the joint rates

and divisions applicable to Quebec newsprint destined for

the eastern United States were the ones set under the

pre-Staggers Act regulatory regime. Conrail and D&H’s

rates on aliernative routes between any given two points

were equal, and the divisions apparently were roughly in

proportion to mileage. Pet. App. 32a.°

In 1982, the Canadian Pacific Railroad and the Ca-

nadian National Railroad, faced with increasing com-

petition from trucks, proposed lower joint rates for news-

print. Conrail accepted the Canadian proposals for lower

joint rates on routes for which it was the only American

rail carrier but rejected them for routes also involving

2 Substantial portions of 49 U.S.C. 15(6) (1976) have been car-

ried forward into current law. See 49 U.S.C. 10705(c). However,

the “just, reasonable, and equitable” standard of 49 U.S.C. 15(6)

(1976) has been replaced by a different standard: “Divisions of

joint rates * * * must be made without unreasonable discrimination

against a participating carrier and must be reasonable.” 49 U.S.C.

10701 (a).

3 Although the record does not indicate the preexisting divisions

between Conrail and D&H, it gives no reason to suppose they were

not roughly in proportion to mileage. The parties do not controvert

the court of appeals’ statement (Pet. App. 3a) that “[el]ach rail-

road’s share of the rate usually is in proportion to the percentage

of miles traveled on that railroad’s tracks.”

D&H. Following a “make or buy” policy,‘ Conrail indi-

cated it would agree to a lower joint rate on the routes

involving D&H only if the division were adjusted so that

Conrail earned as much profit on the route involving

D&H as it would on the route not involving D&H. Pet.

App. 4a, 2la. Because the D&H portion of these routes

was significantly longer than Conrail’s, Conrail’s proposal

amounted to a significant shift in the preexisting divi-

sions, to Conrail’s benefit and D&H’s detriment. D&H,

faced with a choice “between giving up almost all of its

profits on a given route and losing entirely the ability

to carry freight on the route,” id. at 4a, rejected Con-

rail’s proposal.

2. D&H filed an antitrust suit against Conrail, al-

leging (as narrowed during litigation) that, in violation

of Section 2 of the Sherman Act (15 U.S.C. 2), Conrail

had monopolized and attempted to monopolize the trans-

portation of newsprint from Eastern Canada to the mid-

Atlantic states, primarily by adopting and implementing

the “make or buy” policy. Pet. App. 15a-17a, 20a.

The district court granted summary judgment for Con-

rail. The parties agreed, for purposes of summary judg-

ment, to the relevant product and geographic markets al-

leged by D&H, and the court presumed for purposes of

its decision that Conrail had monopoly power in that mar-

ket. Pet. App. 18a. The court also found, based on a

single memorandum, “relatively clear proof of Conrail’s

monopolistic intent.” * Jd. at 19a. The court recognized,

4 According to Conrail, the make or buy policy “means that

Conrail would not ‘buy’ a service (in this case, D&H’s rail trans-

portation for part of a shipment) if it could ‘make’ that service

itself less expensively” and that “Conrail would not ‘sell’ its serv-

ices below its profit-maximizing price.” Pet. 3. As the court of

appeals explained, “Under that policy, Conrail would agree to the

reduced rate only if its profit, called ‘contribution’, matched its

profit on the route where it was the sole carrier.” Pet. App. 4a.

’The memorandum, from an assistant vice-president to the

senior vice president for operations, included this statement:

“I’m for monopoly in total! ... So let’s Conrail take and rational-

ize the entire D & H.” Pet. App. 7a, 19a.

however, that intent alone did not suffice to convert

monopoly power into unlawful monopolization. Ibid.

Relying on the jury instruction this Court approved in

Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472

U.S. 585, 597 (1985), the court concluded that the re-

maining issue was “whether Conrail’s make or buy policy

was a legitimate business practice, and therefore not vio-

lative of Section 2, or whether this program was exclu-

sionary, and therefore impermissible under the [Sher-

man] Act.” Pet. App. 20a. The court found that the

policy maximized Conrail’s profits as compared to a policy

giving a larger share of the revenues to D&H. Stating

that “{a] monopolist is not required to engage in prac-

tices which are less profitable than other, legitimate prac-

tices,” the court concluded that the make or buy policy

was a valid business practice and did not violate Section

2. Pet. App. 22a, citing United States Football League

v. National Football League, 842 F.2d 1335, 1361 (2d

Cir. 1988).

Analyzing the same facts in light of the “essential fa-

cilities” doctrine, the court assumed that Conrail’s tracks

were an essential facility. It held, however, that D&H

had failed to show that Conrail had unreasonably denied

access to the tracks, because the make or buy policy,

which set the terms under which Conrail would permit

“access,” was reasonable. Pet. App. 25a-26a. The court

therefore granted summary judgment for Conrail on the

monopolization claim.*® Jd. at 29a.

3. The court of appeals reversed. In its view, “whether

Conrail’s make or buy policy constituted willful anti-

competitive conduct” presented a genuine issue of mate-

ria] fact. Pet. App. 6a. The court explained that although

a profit maximization goal “provides support for an argu-

ment that the policy is a legitimate practice,” id. at Ta,

neither Aspen nor United States Football League held

that conduct intended to maximize short-term profits can-

® The court also granted summary judgement for Conrail on the

attempted monopolization claim, which rested primarily on the

make or buy policy. Pet. App. 26a-28a.

not violate Section 2. Pet. App. 6a-7a. It then concluded

that there was sufficient record evidence to support a jury

finding of monopolization, and that the district court

therefore had erred in granting summary judgment.

Without cataloguing the evidence it deemed sufficient, the

court gave, as examples, a statement by a former Conrail

executive to the effect that “the refusal to concur in

lowered joint rates would have been implemented whether

or not it increased Conrail’s profits”; statements indicat-

ing that several Conrail employees considered a shift of

traffic from D&H to Conrail desirable; a statement indi-

eating that a Conrail analyst believed that at least one

joint rate under Conrail’s make or buy policy would result

in “almost ludicrously low” profits for D&H; the pre-

sumed harm to D&H from implementation of the policy;

and the “monopoly in total” statement (see note 5, supra)

on which the district court relied. Pet. App. 7a.

Treating the “essential facility” theory separately, the

court concluded that Conrail’s tracks were an essential

facility, that duplication was impractical, and that it was

feasible for Conrail to provide the facility to D&H. Ac-

cordingly, the court held that Conrail’s denial of access,

if “unreasonable,” would constitute a violation of Section

2. Pet. App. 9a. The court then concluded that there

was a genuine issue of material fact as to whether the

terms of the make or buy policy were reasonable. In

reaching this conclusion, the court relied on a hypotheti-

cal example constructed by the district court, id. at 22a

n.7, as evidence that Conrail had, in effect, increased the

price Conrail charged D&H for transporting a particular

short haul by 800%.’ Id. at 10a. “The magnitude of

that increase,”’ the court said, “may be sufficient in itself

to create a triable issue as to whether the terms were

unreasonable.” Jbid. The court did not decide that issue,

however, because it believed that “the various statements

of Conrail executives” it had previously discussed “sup-

port our conclusion that there is a triable issue.” Ibid.

7 The record does not indicate whether 800° reasonably approxi-

mates any actual effective price increase in the market in question.

The court added that it need not determine “the circum-

stances under which a legitimate business practice will

shield a defendant from liability for conduct that other-

wise would constitute denial of an essential facility,” be-

cause it he | already determined that there was a genuine

issue of material fact whether the make or buy policy

was a “legitimate practice.” Jd. at 10a-11la.*

DISCUSSION

The central question in this case is whether Conrail’s

refusal to cooperate with its competitor in setting a joint

rate on the basis of the traditional division was exclusion-

ary conduct likely to injure competition.” The resolu-

tion of that issue turns on the competitive significance

of Conrail’s “make or buy” policy as applied in this

case. In our view, D&H failed to “come forward with

‘specific facts showing that there is a genuine issue for

trial,’”” Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

475 U.S. 574, 587 (1986) (quoting Fed. R. Civ. P. 56(e)),

as to any adverse effect on competition flowing from

Conrail’s conduct. Consequently, the court of appeals

should have affirmed the district court’s entry of sum-

mary judgment for Conrail.

Instead, for reasons.that the court’s opinion does not

fully explicate, the court of appeals reversed and re-

manded the case for trial. On this record, the logical

’ The court also rejected Conrail’s contention that D&H had

failed to raise a genuine issue of monopoly power, Pet. App. 8a,

and reversed the district court’s grant of summary judgment on

the attempted monopolization claim. Jd. at lla.

®The complaint in this case alleges both monopolization and

attempted monopolization. Because the district court’s grant of

summary judgment rested on the holding that Conrail’s conduct

was not exclusionary, the court did not focus on the other ele-

ments of those offenses. Although Conrail challenged in the court

of appeals the existence of monopoly power, Conrail does not

renew that challenge here. Accordingly, without expressing a

view on the issue, we will assume that Conrail has monopoly power.

We will also address the nature of Conrail’s conduct without dis-

tinguishing between monopolization and attempted monopolization.

implication of the court’s holding appears to be that a

lawful monopolist must deal with its business rival on

terms that provide the rival with @ reasonable profit, re-

gardless of the effect of the monopolist’s conduct on com-

petition and consumers. That holding distorts the pur-

pose of the Sherman Act, and warrants review by this

Court. Although the decision below is interlocutory and

the court of appeals’ reasoning is not entirely clear, we

believe that the court’s treatment of a monopolist’s obli-

gation with respect to dealings with competitors repre-

sents a sufficiently serious departure from proper anti-

trust principles, in an area of potentially broad applica-

tion, to jusiify this Court’s intervention.

1. a. In Aspen, the Court upheld a jury determination

that the refusal by the operator of three ski areas to

cooperate with the operator of a fourth ski area in al-

lowing the marketing of a four-area ticket was exclu-

sionary conduct in violation of Section 2 of the Sher-

man Act.'® The Court was careful to emphasize, how-

ever, that “even a firm with monopoly power has no

general duty to engage in a joint marketing program

with a competitor.” 472 U.S. at 600. Nor, the Court

added, is the exclusionary character of a monopolist’s

conduct established solely by evidence that the refusal ad-

versely affected the competitor. Jd. at 605; see also Brown

Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (an-

titrust laws enacted to protect competition, not competi-

tors). To the contrary, the impact on consumers must be

considered. 472 U.S. at 605; see also American Academic

Suppliers, Inc. v. Beckley-Cardy, Inc., 1991-1 Trade Cas.

(CCH) 69,296, at 65,091 (7th Cir. Jan. 17, 1991).

The trier of fact must determine whether the challenged

conduct has “impaired competition in an unnecessarily

restrictive way,” 472 U.S. at 605, which requires con-

sideration of whether the firm has been “attempting to

10 The Court noted that conduct sufficient to constitute monop-

olization under Section 2 of the Sherman Act has variously been

termed “exclusionary,” “anticompetitive,” or “predatory.” 472

U.S. at 602.

exclude rivals on some basis other than efficiency.” [bid.,

quoting R. Bork, The Antitrust Paradox 138 (1978).

Applying those principles, the Court in Aspen focused

on the impact of the challenged conduct on competition.

It concluded that the defendant’s refusal to allow a

four-area ticket to be sold denied consumers the oppor-

tunity to purchase a product that they valued highly. 472

U.S. at 605-607. Although the Court discussed the effect

of that refusal on the plaintiff’s ability to compete, it

did not stop with an observation that the plaintiff’s profits

were reduced. Rather, it set forth the plaintiff’s vigor-

ous attempts, which the defendant thwarted, to develop

alternatives that would allow the marketing of the four-

area ticket that consumers desired. Jd. at 607-608. Fi-

nally, the Court found confirmation for its conclusions

in the defendant’s failure to offer “any efficiency justifi-

cation whatever for its pattern of conduct.” Jd. at 608.

The defendant “did not persuade the jury that its con-

duct was justified by any normal business purpose.” /bid.

Rather, the evidence supported an inference that the de-

fendant “was not motivated by efficiency concerns and

that it was willing to sacrifice short-run benefits and

consumer goodwill in exchange for a perceived long-run

impacc on its smaller rival.” Jd. at 610-611.

b. In contrast to the Court’s approach in Aspen, the

court of appeals in this case failed to consider the impact

on competition and consumers from Conrail’s conduct

and the efficiency justification that Conrail offered in its

defense. Absent from the court’s opinion is any sugges-

tion that this record would support a finding that Con-

rail’s conduct adversely affected competition. The court

supplied no reason to believe-that Conrail’s conduct was

inconsistent with short-run profit maximization, that con-

sumers were denied the benefits of superior efficiency or

deprived of valued services, or that prices were increased

or output reduced. Instead, the implication of the de-

cision is that D&H may prevail upon showing that it did

not have the opportunity to make as much money as it

would have if Conrail had been willing to agree to a lower

joint rate on the basis of the traditional division. That

holding—which is our best reading of an opinion that is

characterized by less than crystalline clarity—represents

a distortion of basie antitrust principles. Moreover, in

our view, this summary judgment record does not support

characterization of Conrai!’s conduct as exclusionary.

(1) To begin with, there is no basis for a conclusion

that any shipper paid more, or would pay more, or would

receive less, because of Conrail’s conduct. D&H cites

nothing in the record to show that any shipper was un-

able to obtain rail transportation for newsprint from

Canada to points in the eastern United States, or that

any shipper was unable to obtain the reduced rate by

shipping over Conrail’s route.'"’ D&H does not contend

that Conrail’s agreement to continue the traditional di-

vision would have allowed D&H and Conrail jointly to

offer a lower rate than the Conrail rate; rather, D&H

wanted the rates for the joint route and the all-Conrail

route to be equal.

D&H asserts that “the elimination of D&H from cer-

tain routes harmed shippers because Conrail was no

longer forced to compete on the basis of anything other

than price, such as speed and quality of service.” Br.

in Opp. 17. But, as a threshold matter, neither the court

of appeals nor D&H cites evidence in the summary judg-

ment record indicating that Conrail’s conduct deprived

D&H of the ability to continue providing service on its

alternative route, and thus eliminated it as a competi-

tor. The court of appeals stated that “there is no ques-

tion that D&H was harmed by the implementation of the

policy.” Pet. App. 7a. But the court did not assert that

there is evidence—and D&H refers to none—demonstrat-

ing that the harm amounted to more than a diminution of

11D&H contends there is evidence indicating “that Conrail

harmed shippers by ignoring their preferences” for reduced rates

(Br. in Opp. 17, citing Opp. App. 3a-da). But that evidence, to

which the court of appeals did not r fer, shows only that Conrail

refused to concur in reduced rates over alternative routes in-

volving D&H, not that shippers failed to receive reduced rates.

D&H’s profits..2 To the contrary, the court of appeals’

opinion suggests that it assumed that D&H could have

made at least some profit at the reduced rate, even on

Conrail’s terms.”

Even if we assume that D&H would have been unable

to operate profitably under Conrail’s proposed division,

nothing in the court of appeals’ opinion or in D&H’s

submissions suggests a reason for making the further,

and critical, assumption that consumers were thereby

disadvantaged.'* D&H points to no evidence that any

shipper preferred D&H over Conrail’ or that D&H of-

fered superior service in any respect. And D&H has not

suggested that it made any attempt to negotiate a joint

rate that afforded Conrail the contribution it demanded

while leaving D&H a share sufficient to allow it to oper-

ate profitably. If D&H offered services that shippers

12 Although D&H sought protection under Chapter 11 of the

3ankruptey Code (six years after the events in question and two

years after it filed this action), D&H offered no evidence that its

insolvency directly resulted from Conrail’s conduct, or even that

its financial condition would not have been improved if it had

entered into a joint rate with Conrail consistent with Conrail’s

make or buy policy.

13 See Pet. App. 4a (D&H would have to give up “almost all

of its profits on a given route” (emphasis added)). See also

Pet. App. 7a (citing evidence that under the make or buy policy

D&H profits “would be almost ludicrously low’’).

4“'Tl}he fact that a railroad discontinues a particular service

offering is not necessarily a sign of diminished competition from

a broad consumer-welfare standpoint. Although a shipper might

in theory prefer one through route to another—maybe one is

faster, and that was the one that has been ‘closed’—in practice

routing is almost always determined by the originating carrier

rather than by the shipper. Time-sensitive shipments are rarely

made by train; if the shipper wants speedy delivery he uses

another mode.” Chesapeake & Ohio Ry. v. United States, 704 F.2d

373, 377 (7th Cir. 1983).

15To be sure, there were shipments over D&H tracks prior

to the rate reduction. But there is no evidence that the shippers,

as opposed to the originating carriers (the Canadian railroads),

selected the route, let alone cared which of two equally priced routes

was selected.

valued and could not obtain from Conrail, then shippers

presumably would have been willing to pay a higher rate

to obtain joint D&H/Conrail service.

(2) Nor, in our view, did the court of appeals identify

any evidence that would justify a trier of fact in con-

cluding that Conrail’s conduct is best understood as ex-

clusionary rather than efficiency-based.’*® The court stated

that a former Conrail executive indicated that “the re-

fusal to coneur in lowered joint rates would have been

implemented whether or not it increased Conrail’s prof-

its.” Pet. App. 7a. But whether Conrail would have im-

plemented its policy even if it was unprofitable does not

establish that the profitable policy it did implement is

exclusionary. As the district court noted, there was no

evidence that Conrail in fact ever refused to concur in

a joint rate where it would have been more profitable to

concur. Jd. at 23a.

The court of appeals also cited other statements of

Conrail officials as examples of Conrail’s exclusionary

purpose. Evidence of intent may be probative of the anti-

competitive nature and effect of conduct.’7 But, even if

Conrail’s employees anticipated or desired the demise of

D&H as a competitor, we do not believe that the record

supports the inference that Conrail’s actual conduct was

exclusionary rather than efficiency-based. Conrail’s policy

16 As Aspen makes clear, exclusionary rather than efficiency-

based concerns may be probative of injury to competition. 472

U.S. at 608-609. This consideration, however, loses force in the

unusual case where, as here, the absence of injury to competi-

tion is plainly shown by other factors.

17 Contrary to Conrail (see Pet. 14, 17-21), we do not under-

stand the court of appeals to have held that intent alone can

transform otherwise lawful conduct into a violation; consequently,

we do not believe that the second question presented by the

petition (Pet. (i)) is raised by this case. The court specifically

noted the statement of a Conrail vice president that he was in

favor of Conrail’s taking over D&H entirely. Pet. App. 7a.

Although the district court considered that statement “relatively

clear proof of monopolistic intent,” id. at 19a, the court of

appeals explained that the statement, “standing alone would not

give rise to a § 2 violation.” Jd. at Ta.

benefitted Conrail without regard to its impact on D&H.

If D&H had accepted Conrail’s proposal and continued to

carry the traffic, Conrail would have made just as much

money as it did by carrying all the traffic over its own

route, and newsprint shippers would have been no better

and no worse off. Conrail was not “sacrific{ing} short-

run benefits and consumer goodwill in exchange for a

perceived long-run impact on its smaller rival.” Aspen,

472-U.S. at 610-611.

Nor was Conrail’s policy one that inherently tended to

exclude an equally efficient or more efficient competitor.

D&H did not offer evidence explaining why it could not

have operated profitably, if its costs were equal to or

lower than Conrail’s. Conrail’s proposed division of rey-

enues would have compensated D&H (for transporting

the newsprint to the transfer point on the D&H ‘Conrail

route) in an amount equal to Conrail’s cost of trans-

porting newsprint to that same point over its own route.

Under that policy, if D&H could not prosper, the infer-

ence to be drawn is that its costs were greater than

Conrail’s..% On this record, it cannot be said that Con-

rail was “attempting to exclude rivals on some basis

other than efficiency.” Aspen, 472 U.S. at 605.

It is true that Conrail’s make or buy policy did not

lower Conrail’s cost of providing service over its own

track. Rather, the policy increased Conrail’s profits by

18 We understand that “cost” in this context is based on an

ICC methodology and includes both variable cost and some portiort

of fixed cost. Conrail was, in effect, offering to “buy” transpor-

tation over D&H’s tracks at some price greater than its own

variable cost, or, alternatively, selling transportation over the

segment of its route that duplicated D&H’s route at a price above

its variable cost. We do not contend that a make or buy policy

such as Conrail’s could never have the effect of excluding an

equally efficient competitor in the long run. And such an exclu-

sion could affect consumers adversely. See, e.g., Chesapeake &

Ohio Ry., 704 F.2d at 377 (closing of more efficient through

routes by means of joint rate cancellations might be profitable

in regulated market and may result in higher costs for trans-

portation). But D&H presented no evidence of such circumstances

in this case.

capturing for Conrail the rents attributable to the seg-

ments of the route on which Conrail faced no railroad

competition. But that does not mean that the policy was

not efficiency-based or lacked a valid business reason.

Ordinarily, an efficient firm will seek to charge a profit-

maximizing price. And it is not an antitrust offense for

a lawful monopolist to charge a monopoly price. See gen-

erally, P. Areeda & H. Hovenkamp, Antitrust Law

{ 7386.1g, at 756 (Supp. 1990); Berkey Photo, Ine. v.

Eastman Kodak Co., 603 F.2d 263, 274 n.12 (2d Cir.

1979), cert. denied, 444 U.S. 1093 (1980); Continental

Cablevision v. American Elec. Power Co., (15 F.2d 1115,

1121 (6th Cir. 1983). In any event, requiring the

monopolist to share its revenues with a rival would not

prevent consumers from having to pay the monopoly

price.°°

ce. In remanding this case for a jury trial on the issue

whether Conrail’s conduct towards D&H violated Section

2 of the Sherman Act, the court effectively established

a monopolist’s duty to deal with a rival where, under

19 Any monopoly power Conrail possesses by virtue of its owner-

ship of tracks is, of course, a product of Congress’s action in

creating Conrail. Although Congress intended Conrail to be sub-

ject to antitrust liability for any misuse of its power (see, e.9.;

H.R. Conf. Rep. No. 1430, 96th Cong., 2d Sess. 83 (1980) (can-

cellation of joint rates) ), there is little room to argue—and we

do not understand D&H to contend—-that Conrail’s acquisition of

control over segmerts of track violated the antitrust laws.

*0 Nor should the fact that regulatory policy required the monop-

olist to share its profits with weaker competitors in the past

impose a duty on the monopolist to continue sharing them once

regulatory restrictions are removed. The Court in Aspen found

it significant that the defendant had cooperated with the plain-

tiff in the past because the development and persistence of that

cooperation was evidence that the cooperation was efficient. Aspen,

472 U.S. at 604 & n.31. But in Aspen, unlike this case, the cooper-

ation had “originated in a competitive market,” and similar

arrangements prevailed in other competitive markets. Jd. at 603.

Here, in contrast, past practice was dictated by regulation and

not by market forces. In that setting, there is no basis for in-

ferring that a change in the defendant's practice is not based on

efficiency concerns.

Aspen, no such duty exists. Although the court did not

delineate the scope of that duty, the implication of its

holding is that a monopolist must deal on terms that

provide its rival with a reasonable profit, even if the

monopolist must reduce its own profit to do so and there

is no adverse effect on consumer welfare from a refusal

to deal. We know of nothing in antitrust law that would

require a monopolist to subsidize its rival’s profits in this

manner; indced, such a requirement would be both un-

sound in theory and unworkable in practice.

Equally unsettling, the court’s standard offers the

monopolist no guidance in setting its price to a rival, if

it must subsidize its rival’s profit. Liability would in-

evitably turn on the trier of fact’s conception of a rea-

sonable price and 2 reasonable profit. The court of ap-

peals seems to have decided this case in the spirit of the

Transportation Act of 1920 ch. 91, 41 Stat. 456, not

under the law of the Sherman Act. It is the former,

not the latter, which “was designed for affirmative use

in relieving the financial needs of weak carriers.”

Great Northern, 343 U.S. at 569.

2. Casting the issue in terms of an essential facilities

analysis provides no additional support for the court of

appeals’ conclusion.*' Even if we assume, as the district

court did, Pet. App. 25a, that short-haul Conrail tracks

that reach locations to which D&H lacks direct access

may be considered an essential facility, D&H never re-

quested the right to use those tracks to provide service

itself, so far as this record reveals. Nor is D&H’s com-

plaint that Conrail will not provide service on those

21 Although this Court has never explicitly relied on the essential

facilities doctrine and declined to consider it in Aspen, the elements

of that doctrine are widely accepted in the lower courts. A four

factor test is conventionally applied: “(1) control of the essential

facility by a monopolist; (2) a competitor’s inability practically or

reasonably to duplicate the essential facility; (3) the denial of the

use of the facility to a competitor; and (4) the feasibility of provid-

ing the facility.” MCI Communications vy. American Tel. & Tel. Co.,

708 F.2d 1081, 1132-1133 (7th Cir.), cert. denied, 464 U.S. 891

(1983), quoted at Pet. App. 9a.

tracks to D&H customers on a nondiscriminatory basis.”

D&H’s essential facilities claim reduces to a restatement

of its argument that Conrail was obligated to share with

D&H a portion of its monopoly revenues. That is, the

true “essential facility” here is not track; it is money.

Considering D&H’s claim under an essential facilities

rubric should not change the result under Section 2.

That is because D&H’s claim still should fail unless Con-

rail’s refusal to cooperate on the terms D&H desired

adversely affects competition.“ “The essential facilities

doctrine is predicated on the assumption that admission

of the excluded applicant would result in additional com-

petition in an economic * * * sense.” Mid-South Grizzlies

v. National Football League, 720 F.2d 772, 787 (3d Cir.

1983), cert. denied, 467 U.S. 1215 (1984); ef. Olympia

Equip. Leasing Co. Vv. Western Union Tel. Co., 797 F.2d

370, 379 (7th Cir. 1986) (essential facility must be rea-

sonably “indispensable to effective compelition”) (em-

phasis added), cert. denied, 480 U.S. 934 (1987). The

issue whether the denial of access is unlawful cannot be

approached solely by considering the impact of denial on

a particular competitor. Where, as here, the party seek-

ing access to a facility seeks merely to “share[] the

22 For that reason, the court of appeals’ reliance on United States

v. Terminal R.R. Ass'n, 224 U.S. 383, 411 (1912), is misplaced. The

passage of the Court’s opinion quoted by the court of appeals (Pet.

App. 9a-10a) discussed a requirement of nondiscriminatory access

to an essential facility. Terminal R.R. did not impose a general

duty to deal on “reasonable” terms.

23 To the extent that the court of appeals considered denial of

access to an essential facility to constitute a distinct antitrust of-

fense, see Pet. App. lla (referring to “the antitrust offenses of

monopolization, denial of essential facilities and attempted monopoli-

zation”), we disagree. Section 2 of the Sherman Act establishes

no offenses other than monopolization, attempted monopolization,

and combination or conspiracy to monopolize. The “essential facil-

ity” doctrine simply describes one form of conduct that may, in

some circumstances, constitute monopolization or attempted mo-

nopolization.

17 4

monopolist’s gains,” increased competition is unlikely.

D&H may have required more favorable terms in order

to achieve a certain level of profits, but requiring Con-

rail to grant D&H access on those terms will not increase

competition: it will neither dilute any monopoly power

Conrail has by virtue of its control of one segment of a

route, nor affect the price and terms offered shippers.

The court of appeals did not ask whether the denial

of access to D&H would have an anticompetitive effect;

rather, as we read its somewhat Delphic opinion, the

court was of the view that Conrail’s conduct could be

found unlawful solely by virtue of the magnitude of

Conrail’s increase in price and statements by Conrail

executives that the court interpreted as supporting an

exclusionary motive. But, if Conrail’s conduct was, as

the court did not dispute, designed to maximize its

profits (both short and long-term), its conduct could be

found “unreasonable” only if the jury were entitled to

find that D&H had a right to share in Conrail’s profits.”

It is not the purpose of the antitrust laws, however, to

impose the duty on a monopolist to assure that its rivals

obtain a sufficient level of profit.

The Fourth Circuit’s decision in Laurel Sand &

Gravel, Inc. v. CSX Trans., Inc., 1991-1 Trade Cas.

(CCH) {| 69,312, at 65,185 (Jan. 30, 1991), illustrates

*4 Areeda, Essential Facilities: An Epithet In Need Of Limit-

ing Principles, 58 Antitrust L.J. 841, 852 (1990) (“A single firm’s

facility * * * is ‘essential’ only when it is both critical to the plain-

tiff’s competitive vitality and the plaintiff is essential for competi-

tion in the marketplace”; “[n]o one should be forced to deal unless

doing so is likely substantially to improve competition in the mar-

ketplace by reducing price or by increasing output or innovation.”).

*5 Although the court did not explicitly articulate that proposition,

we believe it to be the logical implication of the court’s reasoning.

If Conrail’s increase in its share of contribution exposes it to lia-

bility even though that pricing policy maximizes Conrail’s short

and long-term profits and does not injure consumers, the only jus-

tification for so holding must be that Conrail’s conduct is not “eco-

nomically reasonable” to D&H.

our point.*° There, the plaintiff alleged that defendant

CSX had denied it access to an essential facility (CSX’s

track) by offering to transport the plaintiff’s goods,

while denying trackage rights to the piaintiff over CSX’s

track. Viewing CSX’s offer of transportation as an al-

ternative means of access to the facility, the Fourth Cir-

cuit considered whether CSX’s offer of transportation

was reasonable. It then held that the transportation

offer was “a reasonable alternative” to trackage rights

because it was “reasonable from CSX’s* perspective” to

offer “$2.12 per ton, a penny over the variable costs.”

Id. at 65,190. The court added that “the reasonable

standard of the access factor can not be read to mean

the assurance of a profit’? for the person seeking access.

Ibid. In contrast to the Fourth Circuit’s sound analysis,

the court of appeals here seems to have required just

that assurance.

3. In holding that a trier of fact could find unlawful

Conrail’s refusal to cooperate on the terms D&H desired,

without regard to the effect of the refusal on competi-

tion, the decision below represents a serious distortion

of antitrust law. Allowing a jury to evaluate the rea-

sonableness of Conrail’s actions from the standpoint of

D&H’s interests would, in practice, nullify this Court’s

admonition in Aspen that monopolists are under no gen-

eral obligation to cooperate with their rivals. The result

would be to transform Section 2 of the Sherman Act

from a guardian of competition to a regulatory statute

focused on the weifare of competitors.

Such a transformation, which in this case resurrects

an abandoned regulatory regime, would have substantial

anticompetitive consequences. Recognizing a duty to

share profits with competitors would reduce incentives

to investment and innovation by siphoning off the re-

wards normally accruing to desirable behavior. And dis-

tributing profits to competitors would reduce the incen-

tive to strive for greater efficiency, or even prevent the

“6 The court of appeals discussed the district court’s decision in

Laurel Sand, Pet. App. 10a; subsequently, the Fourth Circuit af-

firmed the judgment in that case.

exit of inefficient firms from the market and the redirec-

tion of their resources to more productive uses. More-

over, the duty the court of appeals appeared to create

could chill aggressive_competition as firms, uncertain of

what prices they may charge their competitors and yet

avoid liability, were forced to set prices on some basis

other than ordinary profit maximization. In effect, firms

would be forced to guess what prices would be required

by unpredictable regulatory decrees issued by particular

juries.

We note, in closing, the obvious prudential factors

pointing in favor of letting this case go, namely, it is

of course in an interlocutory posture, and the court of

appeals was less than clear about the nature of the re-

quired “reasonable” dealing that it applied to Conrail’s

conduct. That being said, the fact remains that the court

of appeals has held that the trier of fact could find Con-

rail liable in the absence of any reason to believe that

consumers and competition were adversely affected. The

only issue for trial is whether Conrail’s terms for coop-

eration were “reasonable” in some sense foreign to the

antitrust laws.

The very requirement that such an issue need be sub-

mitted to trial, rather than resolved on summary judg-

ment, is itself a serious error. The salutary principle re-

flected in this Court’s decision in Matsushita—a point

that bears reemphasis—is that antitrust defendants

should not be subjected to the formidable burdens and

risks of trial on the basis of evidence that is insufficient

to support a viable theory of antitrust liability. Decisions

such as this one, by failing to apply Matsushita with

rigor and by misapplying basic antitrust doctrine, not

only affect the particular parties but also, through their

impact on antitrust counseling, more broadly influence

business practices. Indeed, the vagueness of the court’s

opinion may contribute to its impact, because the threat

of burdensome litigation and possible treble damages lia-

bility tends to induce firms to stay well within the bounds

of established law. In light of these considerations, we

believe that review by this Court is warranted.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.